Assume that a parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2012 and 2013:

	Subsidiary Net Income	Intercompany Inventory Sales	Gross Profit on Unsold Inventories	Receivable (Payable)
2013	$300,000	$58,000	$14,000	$24,000
2012	$200,000	$48,000	$17,500	$19,000

Assume that inventory not remaining at the end of the year was sold outside of the consolidated group.

a. How much Equity Income should the parent report in its pre-consolidation income statement the year ending 2013 assuming that it uses the equity method of accounting for its EquityInvestment? Assume the parent company uses the full equity method to account for its subsidiary.

$Answer

b. Prepare the required [I] consolidation journal entries for 2013.

Consolidation Spreadsheet
Description		Debit	Credit
[Icogs]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	To recognize deferred profit on prior year's sale.
[Isales]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
[Icogs]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	To defer gross profit on the intercompany sale.
[Ipay]	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer
	AnswerAccounts receivableInventoryInvestment in subsidiaryAccounts payableSalesCost of goods sold	Answer	Answer